4th Circuit: Violation of Good Manufacturing Process Rules Is Not Grounds for False Claims Act Suit

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The Fourth Circuit Court of Appeals recently ruled that a pharmaceutical company’s violation of the Food and Drug Administration’s rules regarding the manufacturing and packaging of pharmaceutical products does not necessarily establish a claim under the federal False Claims Act, even where the pharmaceutical products were destined for patients covered by Medicaid and Medicare.

In United States ex rel. Rostholder v. Omnicare, Inc., No. 12-2431 (4th Cir. 2/21/14), the relator argued that Omnicare’s violation of the FDA’s Current Good Manufacturing Practice regulations caused the drugs it delivered to be “adulterated.” In this case, those regulations required the pharmaceutical company to handle and package penicillin-based antibiotics separately from non-penicillin-based antibiotics. The relator further argued that under the laws and regulations governing Medicare and Medicaid, only drugs that complied with the FDA’s manufacturing guidelines were eligible for reimbursement.

Even though the relator’s report to the FDA forced Omnicare to destroy approximately $19 million worth of drugs manufactured in violation of the rules, the court found that those violations did not support a claim under the False Claims Act. The court disagreed that violations of the manufacturing practice rules necessarily made the drugs ineligible for reimbursement under the Medicaid and Medicare programs. Indeed, the court ruled that compliance with the manufacturing practice rules is not necessarily required for payment by the government health care programs. Because compliance with the manufacturing rules is not a “prerequisite” to government reimbursement, the court held that Omnicare’s failure to comply with those rules was not fraudulent. Simply stated, Omnicare never made a false statement to the government.

The court’s opinion is remarkable for its discussion of the interplay between regulatory compliance issues and the False Claims Act. While plenty of False Claims Act cases are based on violations of various federal regulations, the court noted that the Act was not intended to become a catchall—or “sweeping mechanism”—to “promote regulatory compliance.” The court seemed satisfied that the FDA had adequate means to address regulatory noncompliance, including several that it deployed when the relator first brought the issue to its attention. The court seemed to suggest that the broad powers conferred by Congress on the FDA over this issue signaled Congress’s intention to except the manufacturing process rules from the False Claims Act.

This decision will undoubtedly have ramifications for future False Claims Act cases based on violations of federal regulations. Defendants in those cases may now have an additional argument for dismissal—that the powers conferred on the relevant regulatory agency are adequate to address the violations at issue and that, consequently, Congress did not intend such violations to support liability under the Federal Claims Act.